Full steam ahead

In his discussion of the commodity markets in the first quarter, Dr David-Michael Lincke focuses his attention on the energy sector, in particular, which has enjoyed a dazzling recovery. This outlook sketches out the factors that will play a part in creating an additional upswing over the course of the year.

2018 was a disappointing year for the commodity markets. Commodities failed to live up to their reputation of providing outperformance and delivering attractive returns in the late expansion phase of the business cycle. First and foremost, this was due to the trade war and the strong US dollar.

Outlook for commodities

If the trade dispute provoked by the US is resolved and there is no significant slowdown in growth in China and emerging markets, we expect Picard Angst's commodity solutions to provide total returns of more than 10% for the current year.

A host of underlying factors suggest that the commodity recovery will continue in 2019, following the dazzling uptick seen in the first quarter of the year:

The impact of the slump in capital expenditure and investment in new production and manufacturing capacities over the past decade, which has put limits on supply

Rising core inflation in the face of dwindling reserve capacity and employment growth

The imminent gradual weakening of the US dollar, acting as a tailwind for commodity prices

Focus on: Energy markets

In mid-2018, the prospect of US sanctions against Iran, in the face of limited reserves, fuelled fears that prices could climb to more than USD 100 a barrel. OPEC and Russia abandoned their production cuts, causing prices to drop to USD 50 by the end of the year.

The renewed reduction in production quotas by Russia and OPEC, paired with US sanctions against Venezuela, triggered the dramatic recovery that saw prices rise by more than 30% in the first quarter. Against the backdrop of production-related steps and sustained growth in global energy demand, oil reserves around the globe have started to shrink once more.

The uptrend could continue in the second quarter of the year. OPEC postponed its reassessment of production cuts until June, and there are increasing calls for an extension. One proponent of this is Saudi Arabia, which seems willing to put its desire to defend its market share to one side for the sake of stabilising public finances. Exemptions from US sanctions against Iran expire in May and it is doubtful whether they will be extended.

Industrial metals

Of the base metals, copper provided momentum in the face of ever-lower stockpiles and substantial drops in mining production, which again put the forward curve into backwardation. However, prices for nickel and zinc also rocketed due to the diminishing likelihood of a rapid increase in supply and, in the case of nickel, the return of suggestions that the electrification of personal passenger vehicles might boost potential demand for this metal. In general, the supply situation for many base metals remains tense in light of the continuing decline in inventory: supply shortfalls are expected over the next few years.

Precious metals

Precious metals suffered from an excessive amount of investor pessimism in the previous year. Investors only started to see them in a more favourable light at the end of the year, in view of a more risk-averse approach on the financial markets. Given the return of a pronounced appetite for risk in the first quarter, it is all the more astonishing that the price of gold, say, not only defended its gains but even, at times, continued to climb. The central banks' about-face in terms of their normalisation efforts played a crucial role in this. As a result, real interest rates fell significantly, and in turn, so did the opportunity cost of holding precious metals. Along with the general increase in uncertainty about the future outlook for the global economy and the financial markets, this suggests that the price of gold will continue to rise, as will demand for this metal.

Agricultural commodities

Participants in the market appear to hold pronounced optimism for a constructive solution to the US-China trade dispute, and yet, of the agricultural commodities, grain prices were particularly weakened in the first quarter, being represented in broad-based benchmarks by US contracts. China's ongoing boycott of US agricultural commodities has contributed to a significant increase in stockpiles, particularly for soybeans. Few alternative buyers have stepped up to the plate, due to the lack of export competitiveness caused by the strong US dollar. Until the trade war is amicably resolved, US grain prices are likely to remain squeezed.